The eastern Mediterranean basin could replace depleting North Sea reserves on international markets, Israel’s energy minister tells Petroleum Economist. But it may struggle to find markets for its gas

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After years of closing its waters to foreign exploration Israel is sending a clear message that its offshore is open for business. It wants to position itself as a key gas supplier to the eastern Mediterranean and continental Europe.

In August the country launched its first offshore licensing round in the hope of luring investors into its waters.

There are 24 blocks on offer in the Levant Basin, in the eastern Mediterranean Sea. The blocks vary in size, up to 400 sq km and sit in water depths of between 1,500-1,800 metres. The bidding round closes at the end of March 2017.

"Over the next few months we’re going to offer our economic water for new exploration and discoveries,” Dr Yuval Steinitz, Israel’s energy minister, told Petroleum Economist. “In a few years the North Sea will be replaced by the eastern seas.”

Israel wants to export gas from the Leviathan field in the Levant Basin to Egypt, Jordan, Turkey, Palestine and Europe.

Steinitz said that the delay in developing the 22 trillion cubic feet Leviathan field, discovered in 2010, has cost Israel tens of billions of shekels in lost revenues.

Attractive terms

Royalties are set at 12.5%, companies can bid for any number of blocks but awards are capped at eight and licenses will be for an initial three-year term with the option to extend every year up to a total of seven years.

Jim Thomas, an analyst at IHS Markit, said the terms on offer are ‘better than or equivalent’ to their neighbours’.

“The sense of urgency here is very much apparent,” Thomas told an Israeli gas investment forum in London.

But investors may be put off by previous political squabbles within Israel.

In 2013 the government proposed capping gas exports at 40% of reserves, or around 34 trillion cf. Critics said that the limit would curb international oil companies' appetite for exploration in Israel's offshore.

The country introduced new regulations in 2015 for the development of offshore reserves in a bid to end years of upstream uncertainty.

In September last year the Israeli parliament finally gave the green light to a framework regulation designed to encourage the development of offshore reserves, with a US-Israeli consortium given the go-ahead to develop the Leviathan gas field.

"A year ago when I became energy minister I said enough is enough and this is high time to conclude the debate and offer a clear, unified policy,” Steinitz said. “Israel is back in business after a few years off. It’s not enough to have a lot of potential. It’s my job to make Israel very attractive for investors.”

Steinitz said the government will reserve around 540bn cubic metres (19 trillion cf) of domestically produced gas for the domestic market over the next 30 or 35 years. That's more than enough to meet domestic demand and means that output from existing discoveries alone will allow for about 300-350bn cm exports, perhaps even more.

If Israel does manage to lure foreign investors to bid for blocks in the upcoming licensing round, the country will face much bigger challenges finding markets for its gas.

New projects are not likely to be sanctioned in the midst of a global gas glut, low prices and sluggish demand. The country is relying on gas demand in its target export markets skyrocketing over the next two decades to boost prices and justify new projects being sanctioned.

"We’re thinking about the next step in 20 or 30 years. The current low gas prices are not necessarily relevant in terms of longer-term investments,” Steinitz said. "Over the next three decades the world will need more and more natural gas."

Steinitz said gas demand in both Turkey and Egypt is expected to double over the next decade, to around 100bn cm per year.

But consumption in Europe – one of Israel’s key target export markets – has fallen over the past two years and prices remain depressed.

Europe's financial woes during the global financial crisis, a resurgence of coal and confusing government energy policies have all helped to depress its demand for natural gas over the past decade.

Last year the continent consumed 903.1m tonnes of oil equivalent of natural gas, according to Cedigaz. That’s down from the 984.2m toe the continent consumed in 2005.

Israel will face stiff competition for a share of Europe’s supply market from Russia, Qatar and now the US.Steinitz said that over the longer term demand and prices will pick up and Europe in particular will welcome an alternative supply source to Russia.

"In around ten years there will be very serious the depletion of the North Sea and I can tell you that the European Energy commissioner, who I have already met, sees the eastern Mediterranean basin as some kind of replacement to it,” Steinitz said. “Of course you’ll have gas from Russia, from Qatar or the US but our region and Europe will need to consume more, and would like to diversify reliable sources of natural gas supplied with pipes through the eastern Mediterranean."